Audit Policy Update

• Accountancy Europe calls to strengthen the financial reporting ecosystem on fraud and going concern
• ESMA’s stakeholder group issues opinion on Wirecard
• Accountancy Europe’s response to the IAASB Discussion Paper on fraud and going concern
• Auditors could hold the key to climate crisis
• UK: Operational separation of audit practices moves to the next stage of implementation

Accountancy Europe calls to strengthen the financial reporting ecosystem on fraud and going concern

Recent fraud cases, corporate failures and the pandemic’s impact have led us to issue two publications (and their summaries) with recommendations to strengthen the financial reporting ecosystem, respectively on:

• Going concern
• Fraud

We explore how the main parties interacting in this ecosystem can improve dealing on those fronts: auditors, companies’ boards and management, legislators, standard setters and regulators. Tackling fraud and corporate failures requires them to coordinate to make the system more resilient.

We call for a joint effort of key parties to strengthen the ecosystem. To this end, we ask relevant stakeholders to send their feedback on our recommendations by 30 April 2021.

Member State option for delaying ESEF in the EU Official Journal

An amendment to the Transparency Directive was published in the European Union (EU) Official Journal. EU Member States (MS) may allow issuers to apply the European single electronic format (ESEF) for financial years beginning on or after 1 January 2021 instead of 2020. MS should notify the European Commission (EC) before 19 March 2021 of their duly justified intention to allow the delay.

We note that many MS have already notified the EC.

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Green MEP renews calls for revamp to EU audit rules

Member of the European Parliament (MEP) Sven Giegold (Greens-EFA/Germany) has issued a statement in response to the latest reports on Wirecard from Germany.

Giegold criticises the focus of Wirecard discussions on mandatory audit rotation and increased liability caps. Instead, he argues that the main problems are that auditors are paid by the entities that they audit, and ‘parallel consulting business’ co-exist in audit firms.

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ESMA’s stakeholder group issues opinion on Wirecard

European Securities and Markets Authority’s (ESMA) Securities and Markets Stakeholder Group (SMSG) issued its ‘initial overview report’ on Wirecard on 1 March. It includes a set of recommendations to address what SMSG sees as the major shortcomings that led to fraudulent reporting by the German fintech firm.

SMSG’s opinion also includes some audit related recommendations, such as:

• the EC to reflect whether to clarify auditors’ duties to report on irregularities and to grant them corresponding powers, such as the rights for the auditors to access information, in particular from employees
• rotation system in auditing teams
• joint audits for large listed entities in Europe
• ‘appropriate liability caps’ for auditors

This report has also pointed to several serious problems in the supervision of Wirecard. The SMSG recommends that ESMA investigates in more detail whether there is ground to trigger an investigation into the relevant competent authority for non-compliance with EU law.

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ESMA proposes changes to Transparency Directive in response to Wirecard

ESMA published a letter it sent to the EC, calling for legislative changes to Transparency Directive to address Wirecard issues on 3 March. The audit related recommendations include:

• as part of the enforcement of financial information by National Competent Authorities, not to allow the outsourcing of the regular examination of financial information to audit firms to avoid potential conflicts of interest
• give relevant authorities/designated entities the power to require auditors, issuers, holders of shares or other financial instruments, and the persons that control them or are controlled by them, to provide information and documents
• require the issuer to have, at its cost, an independent second audit or forensic examination carried out in certain cases (such as when there are suspicions of criminal activity or highly complex cases)
• require third parties or auditors of issuers trading on regulated markets to provide periodic or ad-hoc reports concerning specific accounting issues

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Accountancy Europe’s response to the IAASB Discussion Paper on fraud and going concern

In the comment letter to the International Auditing and Assurance Standards Board (IAASB) Discussion Paper, we have highlighted that:

• fraud and going concern are complex matters and there is no one-size-fits-all solution that can be offered by the financial statements audit
• only concerted efforts and commitment of all the key parties can achieve tangible results in the public interest
• the IAASB can play a crucial role especially in narrowing the knowledge gap
• the IAASB proposals should be based on the outcome of a cost/benefit analysis

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IESBA proposes holistic approach to defining a public interest entity

The International Ethics Standards Board for Accountants (IESBA) released for public comment the Exposure Draft (ED), Proposed Revisions to the Definitions of Listed Entity and Public Interest Entity (PIE) in the Code.

Among other matters, the proposed revisions:

• broaden the definition of a PIE to additional categories of entities
• introduce new requirements for firms to determine if additional entities should be treated as PIEs for independence purposes and to publicly disclose if an audit client was treated as a PIE
• recognise and encourage local regulators to refine PIE categories in regard to national conditions

This ED contains specific questions to seek preliminary views from IAASB stakeholders on those matters relating to the IAASB Standards. Comments are requested by 3 May 2021 and Accountancy Europe will respond to this ED.

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Auditors could hold the key to climate crisis

Auditors could turn out to play a central role in the battle to fight climate change, according to an article published by Reuters which argues that most listed companies’ accounts leave out climate-related impacts on future earnings. Such mistaken accounting is likely to lead to excessive investment in carbon-intensive activities, with negative consequences for society.

The article proposes that auditors sound the alarm where financial statements ignore the climate aspect. This call is backed by a recent movement of investors and standards setters (the International Accounting Standards Board (IASB) and IAASB) who are calling for broader drive towards climate-aware accounts. It appears that auditors are listening – Deloitte and EY included climate risks and the energy transition in Key Audit Matters of oil giants BP and Royal Dutch Shell last spring. They also explained how the Paris Agreement was considered in their review of management accounts.

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In addition, six largest accountancy firms have committed to embracing materiality of climate change for audit purposes.

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Germany to beef up financial regulator in wake of Wirecard case

Germany will create a special financial task force capable of carrying out forensic audits of companies suspected of fraud. This comes as part of a wider reform of financial regulator BaFin triggered by the Wirecard case. The reform of BaFin is contained in a seven-point plan whose centrepiece is a ‘focused oversight body’ to supervise complex companies. The Wirecard saga revealed that oversight of such firms in Germany is too often split between separate bodies responsible for the banking sector, financial markets and money laundering, and some companies fall through the cracks.

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UK: Operational separation of audit practices moves to the next stage of implementation

The Financial Reporting Council (FRC) published principles for operational separation of the audit practices of the ‘Big 4’ firms in July 2020. The FRC reviewed these plans and discussed them with the firms individually and is now content for the firms to move to the next stage of implementation.

The modifications the FRC made to the principles aim to:

• clarify that services provided to non-audited entities should be commissioned by those charged with governance at the entity or be assurance services for third party recipients
• increase the minimum proportion of revenue within the ring-fence that must be derived from audit
• confirm that the audit practice should not receive fees for introducing business to other parts of the firm and that partners in the audit practice should not be incentivised for sales passed to other parts of the firm

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